Good morning, and welcome to the Dean Foods Company's Third Quarter 2011 Earnings Conference Call. Please note that today's call is being recorded and is also being broadcast live over the Internet on the Dean Foods' corporate website. This broadcast is the property of Dean Foods. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of the company is strictly prohibited.

At this time, I would like to turn the call over for opening remarks to the Vice President of Investor Relations, Mr. Barry Sievert. Please go ahead.

Barry Sievert

Thank you, Kim, and good morning, everyone. Thanks for joining us for our third quarter 2011 earnings conference call. We issued a press release this morning, which is available on our website at deanfoods.com. The release is also filed as an exhibit to a Form 8-K available on the SEC's website at sec.gov.

Also available during this call at the Dean Foods' website is a slide presentation, which accompanies today's prepared remarks. A replay of today's call, along with the slide presentation, will be available on our website beginning this afternoon.

The earnings per share, operating income and interest expense information that will be provided today are from continuing operations, and have been adjusted to exclude the expenses related to: facility closings and reorganization; expenses related to litigation matters; expenses related to asset write-downs; gains or losses from the divestiture of assets; and other non-recurring item, in order to enable you to make a meaningful evaluation of our operating performance between periods.

The earnings release contains a more detailed discussion of the reasons why these items are excluded from the consolidated results, along with reconciliations between GAAP and adjusted earnings, and between net cash flow from continuing operations and free cash flow from continuing operations.

We also would like to advise you that all forward-looking statements made on today's call are intended to fall within the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements will include, among others, disclosure of earnings targets, as well as expectations regarding our branding initiatives, expected cost savings, leverage ratios and various other aspects of our business. These statements involve risks and uncertainties that may cause actual results to differ materially from the statements made on today's conference call. Information concerning those risks is contained in the company's periodic reports on Forms 10-K and 10-Q and in today's press release.

Participating with me in the prepared section of today's call are Gregg Engles, our Chairman and CEO; and Shaun Mara, our Chief Financial Officer. Gregg will start us off by providing a general review of results, walking through the performance of the operating units and current business trend. Following Gregg, Shaun will offer some perspective on our financial results before turning the call back to Gregg for some additional commentary, the forward outlook and other closing comments. We will then open the call for your questions.

With that, I will now turn the call over to Gregg for his opening remarks. Gregg?

Gregg L. Engles

Thank you, Barry, and good morning, everyone. We appreciate your continued interest in Dean Foods. As you can see from our press release this morning, our underlying business continues to make progress, and the third quarter marks the return to growth with 5% growth in consolidated operating income and 39% adjusted EPS growth.

However, before we discuss the financial results in more detail, I'd like to take a minute upfront to address the significant write-down of goodwill we took in the quarter on our Fresh Dairy Direct business unit. We took a non-cash charge of $1.6 billion, net of tax, which is reflected in our GAAP financial results, but has been eliminated from our adjusted results in keeping with our practice of excluding nonrecurring items for the purpose of comparability. This charge represents the lower end of the estimated range of the total write-down that could be as much as $1.7 billion net of tax. There is still work to be done to finalize the amount of the charge, which we expect to complete in Q4 and adjust the charge accordingly at that time.

Like many companies that were built through a series of acquisitions, the Fresh Dairy Direct business accumulated a significant amount of goodwill on this balance sheet. As we've discussed over the past few years, current economic conditions have resulted in increased challenges for the fresh milk processing industry. Industry-wide volume declines, lower consumer spending and price erosion have lowered the profit outlook for our fresh dairy business.

As a result of these challenges and our view that they are unlikely to improve materially, we performed an interim goodwill analysis of the Fresh Dairy Direct business in the third quarter. This analysis determined the fair value of the Fresh Dairy Direct reporting unit was below its carrying value, resulting in today's charge.

There are 3 things to keep in mind related to the impairment charge. First, the charges in accounting adjustment that reflects significantly changed industry conditions that have impacted both consumption and pricing across FDD's key categories, and that we believe will continue to impact Fresh Dairy Direct going forward.

Second, this charge is related only to the Fresh Dairy Direct business. The WhiteWave-Alpro and Morningstar businesses have not been negatively affected by these conditions to the same degree as FDD, and the goodwill associated with these businesses is not impaired.

Third, this is a non-cash charge and has no impact on our operations, cash flow or financial covenant compliance.

Let's now turn to the operating results for the third quarter. As I mentioned upfront, the third quarter marks a return to growth for Dean Foods. Consolidated operating income of $108 million was 5% above year-ago levels, and adjusted diluted earnings per share of $0.18 are 39% above Q3 2010.

WhiteWave-Alpro again posted strong top and bottom line results, driven by solid category dynamics, effective pricing and continued innovation.

Corporate expenses declined due to our cost-focused strategic agenda, resulting in a return to consolidated operating income and EPS growth in the quarter.

Now let's look at the results of each of the business segments in greater detail, starting with Fresh Dairy Direct-Morningstar. The business environment for FDD-Morningstar continues to be challenging. Stressed consumers and store-wide inflation have driven negative volumes in many grocery categories in 2011. Consistent with this trend, conventional dairy category volumes continued to be soft. Near-record retail dairy prices contributed to U.S. fluid milk volume declines of 0.9% in the third quarter.

In contrast to the industry declines, our Q3 fluid milk volumes were essentially flat with year-ago levels as a result of new business won in the first half of this year. We remain focused on winning new volume and expect to continue outperforming the broader industry on a volume basis.

In addition to the over 50 million annual gallons of new business we added in Q2, we continue to add -- we continued to add new business that will come online in Q4. FDD categories outside of fluid milk remain particularly soft with our ice cream, cultured products and other product lines, all posting softer year-on-year volume. As a result, across all of Fresh Dairy Direct-Morningstar, total volumes declined 1% when adjusted for divested business.

Commodity inflation continue to post challenges to the business in Q3 and contributed to soft industry volume. Fluid milk prices increased each month of the quarter, peaking in September at $21.78, just shy of the all-time high price recorded in 2007. For the quarter, the Class I price averaged $21.41 per hundred-weight, an 8% sequential increase from Q2, 37% above year-ago levels and the highest quarterly average price ever recorded.

Since bottoming in March 2009, the Class I prices increased more than 130%, rising in 22 out of 30 months through September and every month of 2011 through the third quarter except January. This 2.5 year inflationary March has been challenging for our FDD-Morningstar business, as we work to pass through the rising costs. Reflected at retail, these rising costs have also been hard on the already stretched consumer. Higher retail prices have contributed to volume weakness in many of the categories we participate in.

However, the dairy commodity forecast is modestly more favorable over the intermediate term. Milk production in the United States has been strong this year, increasing 1.6% from a year ago, driven by high prices and solid export demand.

More recently, farm production has remained strong while export demand has diminished somewhat. This has led to declining prices across many dairy commodities, driving a $2.22 decline in the October Class I price and an additional $1.11 decline in November.

Based on recent dairy commodity trading, we expect the Class I Mover to increase modestly in December, and then to resume a path of continued moderate declines through the first part of next year. However, with the ongoing devaluation of the dollar versus world currencies and continued losing [ph] market demand, we expect the long-term average price of milk to be higher than historical average levels.

On the pricing side, retail pricing for private label gallons continued to stabilize at a relatively consistent level above the cost of raw milk. The margin over milk that measures this spread was down a bit in the third quarter from year-ago levels, but has been relatively stable over the past 5 to 6 months.

At the wholesale level, however, pricing remained intensely competitive. Persistent volume weakness across the industry continues to drive increased competitive pressure. The sharply rising milk cost in the quarter, several of our regional brands crossed retail price points and brand elasticity became more pronounced. On a like-for-like basis, branded volumes in Q3 declined faster than private label for the first time this year.

Continued strong cost reduction progress was offset by high input costs, soft volume, pricing pressure and a negative brand to private label mix to result in FDD-Morningstar gross profit that declined 5% in the quarter to $554 million. Fresh Dairy Direct-Morningstar operating profit was $95 million in the third quarter. These results were 18% below year-ago levels. Soft volumes, competitive pricing pressure, record dairy prices and fuel-driven distribution costs that were $13 million above year-ago levels continued to challenge profitability.

Despite solid progress against our cautioned cost initiatives, including an $18 million reduction in selling and G&A versus prior year, too much of our productivity work continues to be offset by these negative trends. However, as dairy prices come down throughout Q4, we expect FDD-Morningstar segment profit to rebound toward the level of recent quarters.

Before moving on to discuss WhiteWave-Alpro, I would like to discuss a few of the positive things happening at Fresh Dairy Direct-Morningstar that may have been overshadowed by our recent business challenges. First, our cost reduction initiatives continued to progress. We're on track to complete the $300 million cost reduction program we've began in 2009 by the end of this year. We've leveraged our aggregate spend to reduce procurement costs. We have increased efficiency across the supply chain. We've reduced cost by optimizing our network.

Within the plants, our supply chain team has worked hand-in-hand with local management to instill continuous improvement practices with detailed productivity measurement to identify and eliminate efficiency bottlenecks. Costs have come out of distribution through leveraging of GPS and advanced routing technology. Year-to-date, fuel consumption is down 5% from year-ago levels. These initiatives have been important in helping to blunt the pressures on the business over the past few years.

Second, we've recently launched our first nationally branded flavored milk product, TruMoo. This reformulated product combines the great taste of pure cocoa, lower total sugar and a high -- and no high fructose corn syrup to deliver a taste that kids love and a nutritional profile that parents want. TruMoo was first launched in schools where we've worked closely with nutritionists and dietitians to provide a healthier alternative to traditional chocolate milk formulation. Our formula meets the criteria of some of the most aggressive school food policy targets, including the USDA's proposed nutrition standards for 2012. TruMoo's presence in nearly 40% of school lunch rooms across the country drives brand familiarity and preference that carries over to support the retail and food service launch of the brand.

Third, you may have seen the recent announcement that Dean Foods was named McDonald's 2011 Supplier of the Year. We're very proud to be singled out of their more than 100 suppliers for this designation. Past winners of this prestigious award include Coca-Cola, Cargill and Tyson Food. It is a proof point for our strategy to win with winning customers through recognition of the strong partnership we have developed with McDonald's. Our success with this world-class customer is driven by our commitment to working with them to drive innovative product offerings and to provide best-in-class service on a day-in and day-out basis.

Let's now turn to our other segment, WhiteWave-Alpro, which once again posted strong results, driven by solid top line growth and a continued focus on cost. Third quarter marks the seventh consecutive quarter that all of our key WhiteWave-Alpro product categories have posted positive growth. This growth is driven by solid volume trends, category leading innovation and brand building commitment across the product line.

In total, third quarter segment net sales grew 11% over the prior year to $531 million. WhiteWave's creamer business, consisting of International Delight and Land O'Lakes creamers, continue to post strong growth in Q3, with net sales up in the mid-teens. Our lineup of International Delight CoffeeHouse Inspirations and new items like Almond Joy and Cinnabon-flavored creamers keep the product set fresh and support the growth of the brand. We continue to have a solid pipeline of innovations behind International Delight, about which we are very optimistic.

Horizon Organic also posted another quarter of strong results, with fluid milk sales growing in the low double-digits for the third quarter. Sales growth continues to be driven by innovation and value-added products such as Horizon with DHA and Horizon single-serve. We do, however, anticipate that organic milk category growth will slow over the next few quarters, as industry supply has tightened considerably.

Our lineup of Silk products continues to post solid growth as well. For the quarter, Silk net sales increased in the mid-single-digits as our almond and coconut milk continued to grow at a rapid pace. Silk is the clear share leader across plant-based beverages, with 4x the share of its nearest competitor. We will continue to drive the category with a solid pipeline in plant-based beverage innovation.

Alpro net sales were up modestly on a constant-currency basis, constrained by the continued economic weakness in southern Europe. Net sales increased high single-digits after currency conversion. Overall, WhiteWave-Alpro continued to leverage growing volumes and tight cost control to deliver operating income of $53 million for the segment, 34% above year-ago levels. Momentum continues across WhiteWave-Alpro, and we look forward to a solid finish to the year.

With that, I'll now turn the call over to Shaun for some additional commentary on the financials. Shaun?

Shaun P. Mara

Thanks, Gregg. Good morning, everyone. I'll take a few minutes now to walk through the consolidated financial performance in the quarter from a P&L, cash flow and debt perspective.

Starting with the P&L, consolidated gross profit of $741 million was $8 million below the year-ago quarter. A 5% decline in Fresh Dairy Direct-Morningstar gross profit was partially offset by 10% growth at WhiteWave-Alpro.

Looking at operating expenses, distribution expense continued to be the most notable headwind. In aggregate, distribution expense was up $20 million or 5% above year-ago levels despite lower usage. Higher fuel costs and increased expense at WhiteWave, driven by capacity constraints, continued to negatively impact the P&L, despite solid progress on our efficiency initiatives.

Outside of distribution, total SG&A costs declined 12% in the quarter as our cost focus drives savings across these areas. As a reminder, our goal was to reduce our SG&A costs, excluding incentive compensation and advertising, by $60 million on an annualized run rate basis by year end. Upon this basis, costs were $22 million below year-ago levels in the third quarter, already exceeding our annual run rate goal. As part of this, we have reduced over 350 employees within SG&A since the beginning of the year. This strong focus on cost reduction across SG&A helped drive 5% growth in consolidated operating income for the quarter.

Interest expense declined $2 million from the year-ago period, and for the full year, we expect interest expense to be in the range of $253 million to $255 million. Our income tax rate of 28% came in lower than in past quarters, driven primarily by the favorable non-cash settlement of a tax examination. With that, we now expect our full year 2011 tax rate to be approximately 34% to 36%. And looking ahead to 2012, we believe our mix of domestic and foreign income should result in a tax rate decline of 1 to 2 points versus our historical rates.

Net income of $33 million resulted in third quarter adjusted diluted earnings per share of $0.18, a 39% increase from the year-ago result.

Turning now to the cash flow and balance sheet. Total net debt increased slightly during the quarter, but remained approximately $3.7 billion. The increase in debt in the quarter was due to an $18 million increase in capital spending, driven by our investment in the new WhiteWave facility and a $64 million build in working capital, primarily due to the significant increases in dairy commodities as our cash conversion cycle was consistent with the year-ago levels. All things being equal, as dairy commodities moderate in Q4, we would expect to see a reversal of our Q3 working capital investment.

At quarter end, leverage ratio of funded debt to EBITDA as defined by our credit agreements, declined to 4.91x versus 4.95x last quarter. As we have said previously, we continue to expect to end the year below 4.75x, more than a full term below our current maximum covenant of 5.75x and also well below the step-down to 5.5x at the end of Q1 2012.

With that, I'll turn the call back to Gregg for some commentary on the forward outlook before opening the call for your questions.

Gregg L. Engles

Thank you, Shaun. Looking ahead, recent trends continue across the business. Fresh Dairy Direct-Morningstar continues to face a difficult volume and competitive wholesale pricing environment. We expect this to continue into the fourth quarter. However, results should benefit from our continued focus on cost reduction across the business, including additional headcount reduction in Q3, moderating dairy commodities and typical Q4 seasonality that has a beneficial mix component. All in, we expect FDD-Morningstar results to rebound toward the level of recent quarters in Q4.

At WhiteWave-Alpro, strong top line trends continue as we enter the seasonally strongest quarter of the year. We therefore expect WhiteWave-Alpro to have a solid end to the year, with full year segment operating income to grow in the high teen.

Corporate costs will continue to be a tailwind for the business, as our sharp focus on SG&A reduction will drive significant year-over-year savings in Q4. In all, we expect fourth quarter adjusted diluted earnings per share to step up from third quarter levels to between $0.20 and $0.25 per share, resulting in full year 2011 adjusted diluted earnings per share of between $0.69 and $0.74 per share.

Looking ahead to 2012, we are not prepared to give full year guidance because our planning process is not yet complete. However, our planning is based on assumptions for continued soft volumes in conventional dairy categories and continued pricing pressures with cost savings and a modestly declining dairy commodity cost environment benefiting result, particularly in the first half.

At WhiteWave, momentum is expected to continue, but there are some challenges to overcome. We will face significant inflation across many important commodities that will need to be offset through our efficiency program. Moreover, while the new plant we're building in Dallas will provide long-term cost advantages, it will likely be a drag on profitability in the first half, as we experience the full depreciation of the new facility but will not yet have it fully loaded with volume.

Also as it relates to our Horizon Organic business, the strong growth in the category -- with the strong growth in the category, demand has outstripped available industry supply, and volume growth rates will need to come down next year until the industry builds new supply.

As a reminder, converting a farm from conventional to organic can be a lengthy process, where periods of supply and demand imbalance are not uncommon as the category experiences rapid growth. Overall, we expect our profit mix to continue to skew toward the faster-growing branded businesses as WhiteWave-Alpro continues to demonstrate strong growth and we step up the work towards stabilizing FDD-Morningstar results.

We'll have more to say about our expectations for 2012 in February when we report our fourth quarter results. I'll now end the prepared section of the call by thanking you again for your continued interest in Dean Foods, and open the line for your questions. Kim?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Farha Aslam.

Farha Aslam - Stephens Inc., Research Division

In terms of the moderation in dairy costs, could you just share with us the different ways that, that benefits your business in terms of volume, pricing? How much of that do you think falls to the bottom line versus being shared as part of your contracts?

Gregg L. Engles

Well, we've covered this topic, I think, repeatedly in terms of the pass-through of the commodities. So the pass-through of the commodity is at least in the large-format section of the trade, highly efficient and highly formulaic. So if milk prices go up $0.10 a gallon or down $0.10 a gallon, that tends to be reflected one-for-one in our relationships with the trade. But there are other effects and there are also some timing effects related to changes in milk prices that either hurt you when prices are going up or help you when they're coming down. So while the pass-through is largely congruent with changes in the price, on -- with respect to timing, sometimes, the timing of the change in price is not perfectly aligned with the timing in the change in your costs. So for example, a number of retailers only change their prices in-store on Mondays, and so they only accept price changes on milk either up or down on the first Monday of the month. That obviously hurts you when prices are going up, it helps you when prices are going down, so there's a modest benefit to that lag in timing with respect to the changes in milk prices. But lower milk prices help you in a number of other ways. First of all, there's a natural amount of product loss, whether it's from product loss in the manufacturing process or spoils and returns, and those product losses cost you less when the basic cost of raw milk is lower than when it's higher, so that's a beneficial effect on the cost side of your business. A portion of our business is fixed price contracts. For example, a portion of our school business is fixed price contracts, and obviously, you suffer margin compression as milk prices rise in those contracts and you enjoy margin expansion as milk prices fall with respect to those contracts. And then certain of our other costs are based on price. So sometimes, commissions to our sales force are priced, rather than volume-linked, and as prices come down, commission expenses and all sorts of things come down. So the net-net of it is, the falling milk price environment is a much more pleasant environment to be in than a rising milk price environment, and we are keenly hopeful that this volume price environment lasts throughout the first half of the year.

Operator

And moving on, our next question is from Alexia Howard from Sanford Bernstein.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

So CapEx was up substantially this quarter. I think that led to a negative free cash flow this time around. Could you remind us of what the drivers of the elevated CapEx are now? And what the outlook is going forward, maybe even out into next year at a high level?

Gregg L. Engles

Yes. The main driver of elevated CapEx in Q2, particularly Q3, which we just reported and continuing into Q4 are the capital costs of constructing our new WhiteWave manufacturing facility in Dallas, Texas. So we spent, against that facility alone, in excess of $40 million against...

Shaun P. Mara

Almost $60 million through the first 3 quarters.

Gregg L. Engles

Yes, so close to $60 million through the first 3 quarters. But in Q4, a big step up in costs against that plant, as we accept equipment deliveries and those sorts of things into those facilities. So it's a bit of a watermelon going through the pipe in Q3 and Q4. As we look out into 2012, total CapEx of this year will be in and around $325 million to $350 million. Looking out into 2012, we should see that capital spending number come back down. We don't have an exact number for you, but it will be down from 2012 levels or from 2011 levels, I'm sorry.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Great. A quick follow-up, advertising spending, I know that's not normally a topic that comes up here. But it looks as though in the last couple of years, it has come up quite a bit. What's your strategy here? And what benefits are you seeing from that increased advertising spend?

Gregg L. Engles

Well, I think the most obvious benefit that I'd point you to is 34% operating income growth in our branded business. So I don't follow as closely as you all on the call follow, the performance of other branded food companies. But if you look at our branded business, we had a unique, I think, amount of strength in our business, and have had for a number of quarters here. So the WhiteWave business would be characterized by a combination of volumes up 5% and pricing up 5%. I don't know if many other companies that are taking both price and achieving increasing volumes like we are in our brand business, and that's driven by the great brands we have, the great categories we operate in and I think by our investments in innovation and marketing in those businesses, so we are continuing to spend meaningfully against those businesses. I think if you go back more than a couple of years ago though, however, sort of the step function change in advertising you see would be associated with our acquisition in mid-2009 of the Alpro business, so that there hasn't been a step function increase in advertising in the WhiteWave business. It's really the acquisition of the Alpro business, I think, in mid-2009 that you see driving significant period-over-period increases in 2010, and particularly in 2010. But we continue to advertise heavily against our brands. One of the realities though, however, of today's marketplace is given the state of the consumer, we are investing as much or more in net price in our branded businesses as we are in marketing as we operate in a somewhat more promotional environment than has existed in the past.

Shaun P. Mara

The numbers themselves are basically flat period-to-period, Alexia. We have not increased advertising for the first 3 quarters of the year versus 2010.

Operator

And moving on, our next question is from Judy Hong from Goldman Sachs.

Judy E. Hong - Goldman Sachs Group Inc., Research Division

Gregg, I guess your fourth quarter guidance, you've talked about the Fresh Dairy Direct sort of returning to the profit levels that you've seen in recent quarters. I guess that implies maybe $110 million to $150 million in fourth quarter or so. How should we think about that as a run rate as we enter 2012 and sort of the puts and takes that would affect that number either the cost savings, the non-milk inflation funds, the volume deleveraging and sort of thinking about the branded versus private label mix situation?

Gregg L. Engles

Yes, I think those are all factors, Judy, that will drive this. The reality of the last several quarters is that we've basically had, with the exception of Q3 and I'll give you a little more insight on, I think, what happened in Q3 on the FDD side of the business, but we basically held operating income flat in that segment for the last 5 or 6 quarters, with declining volumes and the deleverage that, that implies being offset by cost savings. And I think that, that basic dynamic remains in place, right. We still see a soft volume environment. It did mitigate a little bit in Q3 down about 1% rather than down 2%. And we may get a bit of a bounce back in Q4 and going into Q1 of 2012 if milk prices continue to come down. The decline in milk prices though looks like it's going to stall in December, and the factors that we discussed of a robust export environment and a depreciating dollar against a weighted average basket of currencies, I think, puts a little bit of a floor on our milk prices. So if we get some volume uplift from the price elasticity of milk prices coming down, that would be beneficial to our outlook for Q4 and going into the first half. Likewise, given the relative margins that retailers take on our regional brands versus their private label brands today, the decline in retail pricing for our reasonably branded products typically is larger than the decline in private labels in a declining milk environment, which brings our brands back more into value, and that would have -- if that happens, that will have a significant positive mix benefit for us as a company. So those are potential upsides in the FDD world as you look out into Q4 and into Q1. We continue to face non-milk input inflation, so the respite that we're getting in Q4 in fuel or at least the early parts of Q4 were helpful, although I think as you look out and see what actually happened to diesel prices as opposed to what happened to West Texas Intermediate crude, you didn't see as big a decline as you would like because I think our fuel prices are driven more by Brent today, which did not come down as much as WTI came down, and now we're seeing inflation on the fuel side again, so that's a potential headwind as we go into the back half of Q4 and into Q1. And then things like res and [indiscernible] continue to be pretty inflationary. So we've got work to do to offset the inflation and the negative effect of declining volumes in the category, but we have an ongoing program of cost reduction, and that's why we've given the guidance we've given at this point in time for Q4.

Operator

Moving on, our next question will come from Chris Growe from Stifel, Nicolaus.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

I just had a question for you. Obviously, the volume in your other dairy products was a little -- was still soft in the quarter, is that, that's Morningstar-related, I presume? And is that just related to overall higher prices? Do you see those volumes getting a little better as kind of a non-milk volume?

Gregg L. Engles

We have -- we do have weakness in some categories of the Morningstar segment, particularly in our ice cream mix business, which the Q, the third quarter is a big quarter for ice cream mix. And it's really a -- that's really a quick service restaurant business, and it's a quick service restaurant phenomenon. So in the QSR category, with dairy prices at all-time highs and fixed menu prices, you saw much less promotion this year of ice cream and shakes at restaurants, and you saw much more promotion of things that didn't have dairy in them like, well, for example, McDonald's ice Frozen Strawberry Lemonade, right? So more profitable items on the menus being promoted instead of dairy-based desserts on the dessert portion of their menus. So that's going to be a watchout going forward. A high relative dairy commodity environment will have impacts on consumption, and not just at retail, so that's part of the driver in Q3. The other part really is FDD-related, and it's in ancillary categories like cottage cheese and sour cream around our regional brands. And there, what you see is just a -- much the same that you see in milk but an increased level of competition, and an increased focus on cost by retailers, driving more products through the warehouse as opposed to our DSD system in those ancillary categories. So those categories have been weak for several quarters, and we expect them to continue to be pretty weak.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then I just wanted to ask a follow-up question. Do you expect that -- are you going to have a formal cost reduction target going forward or maybe better yet, if you could speak to what you expect in 2012? Is it $100 million a year still or just trying to get a little better sense for the future.

Shaun P. Mara

Agreed, we've got an ongoing cost reduction effort here. I think we'll give you more explicit guidance as -- on the Q4 call in February around the target. But we have an ongoing program of cost reduction built into our business.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Do you want to have like a multiyear target again or will it be sort of an annual target or what do you expect to do going forward?

Shaun P. Mara

I think we'll just address that on the Q4 call.

Gregg L. Engles

And Chris, just one other point as you talk about volume, the one thing to keep in mind and you may have already done this is, we divested yogurt earlier in the year so those volume declines year-on-year are showing up. If you back out yogurt, we've done about 1% in total volume for everything year-on-year.

Operator

Moving on, our next question is from Carla Casella from JPMorgan.

Carla Casella - JP Morgan Chase & Co, Research Division

My question is on the milk side. You mentioned that you don't expect milk costs to go back to the historical levels, just given industry demand and supply. Can you just give us a sense of how much higher you expect the new norm to be? And what kind of pricing you need to see at retail to get your margins on the milk back up into the low 20s from dropping below -- a little below 20 this quarter?

Gregg L. Engles

Well, as to the new normal, if you had asked me this question 5 years ago, I think I would have told you the normal price range for milk was sort of $12 to $13. Today, I'd say the normal price range for milk is going to be $16 to $18. I think that's the difference in the cost buildup on the farm side to sustain supply. So input costs, if you look at the grain complex, we're up from $3 corn to $6 or $7 corn. Fuel's up, double over that period of time. So you just see a much higher cost base for farmers, and therefore, a higher breakeven cost in order to maintain supply. So I think we're in -- I think we've moved up 40% to 50% in terms of what the ongoing normal price is for raw milk inputs in the U.S. In terms of the price environment, what we really need to see there is, we need to see gross or margins on private label milk return to more normal levels. We still are not back to precrisis levels. In fact, I think we're quite a way below precrisis levels in terms of retailer margin on private label milk, which is causing a structural shift in the relationship between private label at shelf and brand at shelf, which is causing a negative mix effect for us, which is really the primary driver of the mix out of gross margin in the business. So when the retail marketplace stabilizes, which I think will be coincident with the abating of the recession and unemployment, then I think we'll return to a more normal mix of business and a more normal margin structure.

Carla Casella - JP Morgan Chase & Co, Research Division

Okay, just as a follow up. With the fourth quarter costs coming down from third quarter, what kind of top line do you need to see in fourth quarter to get that gross margin in milk back up to over 20%? Or will the costs alone won't get you there?

Gregg L. Engles

Yes, I don't -- we don't really analyze the business in those terms, so what we need to see is volumes on a per day, running at 9.6 million to 9.7 million gallons in the FDD business. And again, we need to see the brand-private label gap start to close. And aside from that, we will benefit from the lagging and dragging benefits that I described in milk prices falling in answer to Judy Hong's question.

I'm kind of surprised nobody's asked about this goodwill charge, so I want to kind of touch on this. So you say it has no financial covenant compliance, but I assume your shareholders' equity is now a deficit. So I'm kind of interested in how the covenants don't get impacted by that at all. And my understanding, I'm not an accountant, but my understanding is that you test the goodwill based on the present value of the cash flow capabilities of those brands. And so if you're writing off such a large amount, doesn't that reflect limited cash flow in the future of what those brands can produce?

Shaun P. Mara

I guess, Eric, take a step back from a process standpoint. On an annual basis, you're correct. We look at the goodwill and we assess the fair value of the goodwill, compare it to what the future cash flows are. So we've done that exercise officially last year at the end of the year, and we knew there was a concern there, and we raised that in the 10-K, and we've looked at that, subsequent to that, over the last couple of quarters. As we look at the business model today and all the trends that Gregg has talked about today and on previous calls, we see that trend continuing for the future. And when you do the cash flows on that, that leads to an impairment of goodwill. The process then provides an analysis of what the fair value of underlying assets are and then how that compares to the goodwill you have on the books, which led to the write-down in Q3. In terms of the covenants, we've gone through the covenants. We've talked to the banks, we've talked to the lenders on this, they understand what we're doing, and that there is no impact from their end on what those covenants are out there at this point in time. It will result in a negative shareholder value on the financial statements, and you'll see that in the balance sheet, if it's not in the press release already.

Gregg L. Engles

Yes. We have 2 covenants in our bank deal. We have an interest coverage covenant. Obviously, the retained earnings or the net worth -- the net equity of the business is not a part of that calculation. And we have an EBITDA-to-debt covenant, a leverage covenant, and of course is not affected by that because this is non-cash. So it doesn't affect either the quantum of our debt or the amount of EBITDA and ongoing earnings that we produce. So we have those 2 covenants in our deal, and neither one of them are linked to the shareholder equity amount in our balance sheet. Right, that's...

Shaun P. Mara

They receive leverage out of interest covenants.

Gregg L. Engles

Yes. They're leveraged in interest coverage covenants. So that's the technical answer to the covenant question. Your question around the ongoing profitability of the brands, however, I think I may be misinterpreting your comment, but the test around goodwill is not a test around brands specifically, it's a test around the business. So the goodwill that got booked on our balance sheet that's now being written off in the course of building the business, was the excess of the value that we paid for those businesses over their hard asset value, right. So if we bought a business with one plant and the plant was valued at $25 million and we paid $50 million, the $25 million over the hard asset value got booked as goodwill. And that goodwill was created because we paid for the cash flows of the business at the time, as opposed to the bricks and mortar of the business. And what the goodwill write-down really says today, is that the cash flows of the business today, and as we look out into the future, our belief of -- if the cash flows of this business going forward do not support that goodwill on our balance sheet, right. So to the extent that we have written down goodwill, it is a reflection of the fact -- an accounting reflection of the fact that what we've been saying here for the last 8 or 9 quarters. This business has, for a structurally change to a lower cash flow, lower profitability business, and existed coming out of 2009. And we don't see the fundamental conditions that have caused that decline in profitability, reversing over the forecast period that we have, right. We have declining volumes. You have pressure on pricing because of declining volumes. You have a fundamentally more challenged environment than existed up through 2009, and that's reflected in the goodwill write-down.

Operator

Moving on, our next question is from Amit Sharma from BMO Capital Markets.

Amit Sharma - BMO Capital Markets U.S.

A question about the dairy business. If you look at operating profit down $21 million from last year, and you cited 4 key reasons for that. I just want to get a little bit better understanding of contribution of each of those 4. So yes, that's soft volume, higher fuel-related distribution costs, competitive activity and then branded private label mix. So if you could kind of like give us a little bit more understanding of how each of those 4 impacted quarterly profitability in the dairy business? And the reason I'm asking is that, some of that is deleveraging, which if you have 1% lower volume, it is understandable. But some of that will also reverse going forward as you have pricing, so just if you can, please.

Gregg L. Engles

Yes. I'm not going to be able to give you a waterfall chart of the puts and takes because offsetting the declining volumes, you have productivity and those sorts of things. Probably the most linear thing I can point you to is that, we recovered all of the increase in milk in our pricing. But if you look at our pricing, we did not recover the $13 million increase in fuel, right. So that would be -- aside from that, there's going to be puts and takes, right. There's going to be negative impact from volume offset by productivity. There's brand mix out, which by the way is not inconsequential in the quarter as some of our important brands crossed the $5 and $6 price threshold at retail. But the most linear explanation I can give you or disaggregation of the $21 million, is that we did not recover price for $13 million increase in fuel during the quarter.

Amit Sharma - BMO Capital Markets U.S.

So as we go into the fourth quarter, you expect to recover that $13 million back or at least get pricing to offset most of that?

Gregg L. Engles

Yes. We're pricing to recover all of our non-input costs, although it is not as formulaic as milk. But yes, we are attempting to price to cover all of those costs. And then, of course, the other factors that have hurt you begin to reverse, right. So all of the shrinkage and lags and drags in milk pricing going up, begin to work in your favor, has benefits. Your brands come more in value, and so the business starts to recover some of what it's suffered from what we just remind you again, the highest average milk price in history during Q3.

Gregg, I wanted to follow up on a comment you just made, actually coincidentally, about the milk category. Because I'd see how in the past year, those all-time high Class I Mover prices have contributed to a worsening of the declines. But when I look back at the data you've given us over the past 2 or 3 years about segment performance, it's been a pretty consistent trend down in terms of volume since basically '08. I mean, it looks like it's macro related, and even in '09, when we had some very significant declines in fluid milk prices, you still had a decline in the category. And I guess so to be specific, when we see falling milk prices, like it looks like we will, do you expect positive numbers for the category, and you by implication for Dean Foods? And if not, how do you think the industry is dealing with this as the category gets smaller and smaller?

Gregg L. Engles

Yes, that's a great question, Jonathan, and one that I'm afraid I won't give you a completely satisfactory answer to because there are -- I'll do my best. There are more than one factor driving the change in consumptions. There's the elasticity affected or generated by changes in price. That will help us as milk comes down. However, you're absolutely right. Macro factors around the economy have been a significant driver of decreased volume and a volume declines at an increasing rate over the last 7 or 8 quarters. So this is a category that is highly correlated with the recession because it's an all-household category, right. These products are in every home in America as a general rule. So there's a big chunk of the American population that is struggling, is on food stamps, is on employment assistance, and those people are trimming everywhere. Now I mean, you see this in every category. Look at the cereal category, which is useful, I think, to look at our category. There you've seen volumes consistently down kind of mid-single-digits. In the latest 12 weeks, cereal volume down 5%. I'm actually surprised milk's not down more in the context of that environment. We're fortunate milk has a lot of other ingredient uses. But price alone is not going to be the magic bullet to declining volumes here. So that's why when you look at everything from the goodwill charge to our Q4 guidance to the Q1 guidance and 2012 outlook, we see a soft volume environment, even with declining milk prices, right. So will we get a bump if milk prices come down meaningfully? Yes. Will it be enough to offset the other negative headwinds and turn this category positive? I can't give you an answer to that. But there are -- will be countervailing forces that are negative on volume going forward.

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

And my follow-up would be thinking about the category, earlier this year, the economists at the USDA put out -- they basically put out these plate waste assumptions, about how much food's wasted in different places, and dairy is obviously one of the higher ones just due to its spoilage and whatnot. And they revised upward some of the waste estimates, where, however, they come to those, I'm not an economist. But I mean, could it be that just consumers are getting a little bit more careful about not wasting milk? Maybe and that we've permanently seen a contraction that way even versus what consumption indications are?

Gregg L. Engles

Yes, I think it's entirely possible. Look, I've got 4 kids, 6 and under in my house. And I'm going to guess that the milk that comes out of the carton, about 60% of it gets consumed. Now you know that's a N of 1 in terms of a sample size, but sure. I think consumers are just tightening their belt everywhere, and there is room to tighten your belt everywhere. So yes, I'm sure that's part of it.

Operator

We'll move on to Reza Vahabzadeh from Barclays Capital.

Reza Vahabzadeh - Barclays Capital Inc.

Just as far as the WhiteWave business is concerned, was there any decline in a reduction in advertising spending or corporate expense that specifically affected the WhiteWave business, that helped the EBIT to go higher?

Gregg L. Engles

Not anything unusual. There's always phasing in your advertising, but I think the best way to think about WhiteWave-Alpro will be on a full year basis, and there, what we said in terms of guidance was, operating income would be up high teens for the year. And we've had quarters that were high single-digits this year, and we had a 34% quarter and quarters that were midteens. But when you look at the whole year, you'll see operating income up here between 15% and 20%. So this is a business that has fantastic fundamentals, is executing extremely well, and I think is well positioned to continue to grow.

Reza Vahabzadeh - Barclays Capital Inc.

Right. And as a follow-up, Shaun, the corporate expense reduction that you achieved in the third quarter, does that place you ahead of your full year goal?

Shaun P. Mara

Yes.

Reza Vahabzadeh - Barclays Capital Inc.

So is the target now higher than your prior number of $60 million?

Shaun P. Mara

Good question. We're still working to get to the right number, but we're working to get the cost down as quickly as we can and you saw that in Q3.

Reza Vahabzadeh - Barclays Capital Inc.

Right. But you're ahead of $60 million right now?

Shaun P. Mara

We're ahead of the run rate. With the run rate, we'd be $15 million a quarter, we took $22 million out in Q3.

Operator

And our next question is from Ryan Oksenhendler from Bank of America.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

My question, I guess, to follow up on Amit's question, about the passing through of fuel costs. When you look at 4Q, what have you been telling retailers and showing them that will allow you to take pricing that didn't allow you to take a pricing earlier? And do you think the industry can move towards pushing through some of the nondairy costs into the contracts on a monthly basis, so that there's more of an offset and less volatility quarter-to-quarter?

Gregg L. Engles

Yes, let me take the second part first. We're steadily attempting to do that. It's a customer-by-customer process to improve our formulas for the pass-through of nondairy commodities. With respect to additional pricing in Q4 for fuel, again that's a customer-by-customer exercise, and it just basically involves showing the customer that we haven't recovered all of our fuel costs for the year and negotiation around that. So again, it's a one-off process that we're working very hard at to recover all of our input, our cost inflation in price.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

And if we see -- you said you saw some deflation early in the quarter, but if things start to move up, as you're discussing this with them, can you take pricing fourth quarter so that will offset it in the fourth quarter? Or is there always going to be some type of lag effect?

Gregg L. Engles

There's just a lag effect because of the negotiation process, but we price monthly, right. So if there are moves during a month, we have the opportunity to try to respond to it on our monthly pricing actions. So we're not bound quarterly or yearly. We have an industry model here that involves very frequent pricing. So we do have opportunities to take price. It comes down then into execution in the marketplace, permitting us to take price.

Operator

And it looks like we have time for one more question today, and that will come from David Palmer from UBS.

David Palmer - UBS Investment Bank, Research Division

Just have one question left. I wanted to talk about milk prices, and you talked about, and really just about margins in relation to milk prices. We've been talking about how there might be some near-term commodity relief, and that makes a lot of sense for 4Q maybe into the first quarter. But what would you say about the concern that those near-term relief, just from the timing of having private label milk, maybe not come down as much as the commodity milk and maybe even branded coming down a little bit more, gaining share. Those dynamics maybe near-term lift, but they evaporate quickly as the supermarket channel chases those commodity prices down in an effort to still gain foot traffic in a soft environment. Do you feel like the supermarkets will allow that margin available to processors and retailers to remain high through 2012?

Gregg L. Engles

Look, I think it's a great question. I don't think my crystal ball is that good. But I think what the question highlights is that, we still have difficult category dynamics here and a difficult economic situation that is not going to entirely go away because milk prices go down, right. What I'm absolutely clear about is that, we'll be better off with lower milk prices and declining milk prices than higher and rising milk prices. But the questions that you and Amit and other people are poking around on our -- gee, that the world isn't totally healed here, as it relates to your business and that's an accurate assessment. Like there are still a soft economy, you're still going to have a very competitive retail environment. Milk will still be seen as a traffic builder, you still have declining volumes. So that is the reality of the FDD business, right. I think the reality of the brand business continues to be very different. You have a more upscale consumer, they're employed, they feel more confident. Our brands are on trend with what they want to achieve for themselves and their families. So you still have this divergence of businesses between the all-family commodity business and the higher end, more on trend business. And the all-family commodity business is still going to be shackled to a tough economic environment and a competitive retail environment.

Operator

And that does conclude our Q&A session today. Mr. Sievert, I'll turn the conference back to you.

Barry Sievert

Thank you, Kim. We appreciate all of your attendance on the call today, and your interest in Dean Foods, and we look forward to talking to you in February. Thank you very much.

Operator

And that does conclude our conference for today. Thank you, all, for your participation.

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